Hiking interest rates in May would be the “policy of least regret” for the Reserve Bank of Australia (RBA) as inflation moves higher and further away from target. The sharp increase in fuel costs, sparked by the war in the Middle East, has driven an uptick in consumer spending.
New NAB data out on Wednesday showed consumer spending rose 2.1 per cent in March, driven by a sharp 33.5 per cent increase in fuel spending. Even when fuel is stripped out, spending was up a solid 0.7 per cent month on month.
NAB chief economist Sally Auld told Yahoo Finance the RBA was watching consumption carefully, which was running strong in the back half of last year but had softened slightly in 2026.
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“It’s a really hard situation for the central bank at the moment, because effectively an energy price spike like we’ve had means that they move further away from both of the things that they’re meant to care the most about,” Auld explained.
“Inflation goes higher and further away from target, but then at the same time, growth slows and the unemployment rate goes up – and that takes them further away from full employment.”
Food spending was up 1.7 per cent during the month, which the bank said likely reflected some precautionary stockpiling. Rising construction costs lifted other services spending by 2 per cent.
Spending on discretionary goods remained resilient in March, but consumers began scaling back on discretionary services.
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NAB, along with fellow Big Four banks CBA, Westpac and ANZ, expects the RBA will hike interest rates again in May. Westpac expects three cash rate hikes, with two extra hikes in June and August.
RBA deputy governor Andrew Hauser warned yesterday that inflation was already too high in Australia before the war broke out, and the RBA did not have “high confidence” that interest rates were at the right level yet.
“We still are calling for another rate hike from the RBA in May. What I would say is that we have less conviction in that view than we might have had four weeks ago,” Auld said.
Consumer sentiment dropped by a whopping 12.5 per cent in Westpac’s latest data, marking the biggest monthly decline since the onset of the Covid pandemic.
Business confidence has dropped an alarming 29 per cent, NAB found, which is the second biggest monthly fall in the survey’s history and is a drop not seen since the GFC and the pandemic.